Sunday, 15 May 2016

Lending finance softening

Despite a bit of an uptick in commercial lending in March, total Lending Finance is now in a 12-month downtrend.

Stripping out refinancing and cancellations, new commercial finance has weakened by some 12 per cent over the past year in trend terms.

Looking at the trend series for the components of lending finance, we can see that the growth in housing finance to owner-occupiers has been keeping overall lending ticking along, but commercial lending now seems to be fading after a decent run.

After a series of extraordinarily weak results, personal finance jumped by 6.3 per cent in March.Last rites for mining boom

When breaking out fixed commercial loans by industry it becomes clear than commercial lending to the mining sector in rolling annual terms has crashed, falling by more than 50 per cent over the past year alone.

Mining investment is evidently drying up very quickly for this cycle, and all that remains are the last rites.

Fortunately as a share of commercial lending to all industries, mining has only ever made up a relatively small share of the pie. The fortunes of the economy going forward will as much be determined as sentiment and confidence in other industries.

Investor loans

Drilling into the data, it is noted that property investor loans in Sydney are still returning from orbit after an astonishing boom.

That's not to say that the Sydney property market has softened all that much though - at least, not in the inner suburbs.

Inspections remain very busy for quality properties, and clearance rates in the east are punching at above 90 per cent. Indeed, the preliminary auction clearance rate in Sydney reported on Saturday was above 80 per cent (Domain Group), the strongest preliminary result recorded across all of 2016 to date.

At the macro level property investor lending has been to some extent stymied by APRA, but these March figures precede another interest rate cut, so investment lending is likely to at least stabilise over the coming months.

It is interesting to observe just how dramatically investor lending in the Northern Territory has crashed, down by 52.2 per cent year-on-year in March.

Even still, Darwin dwelling prices have fallen by only 3.7 per cent over the past year to April (CoreLogic), although further declines seem likely, while rents have reportedly fallen by a greater margin.

One of the many curiosities of housing markets is their upwards bias - prices generally rise in capital cities, yet when fundamentals are weak folk are understandably reluctant, unwilling, or simply unable to sell for less than they paid themselves.

Moreover, unlike more liquid asset classes such as equities, there is no clean and simple way to short a housing market, even where it is clearly overvalued. Shorters instead tend to look at banks, developers, or mortgage insurers as the best available proxy.

People often will only sell for a loss when forced to do so by redundancy, vacancies, or in outright panic if the market goes into freefall mode.

The fundamentals have been weak in Perth over the past year too, yet median prices have only fallen by 2.1 per cent over the year to April, and in many cases may barely have declined at all.

The wrap

Overall, the figures suggest that despite record low lending rates to business, commercial lending has been fading.

The value of property investor loans increased by 1.1 per cent in March, following a 3.1 per cent gain in February, but total lending to this sector remains well below its peak.

---

The week ahead

Some interesting news is lying in wait for us this week.

Data due to be released includes Sales of New Motor Vehicles, and the Wage Price Index for Q1 2016 (market forecasts expect a 0.5 per cent growth in wages for the quarter, although the forecast range is surprisingly wide).

The most important news of the week by a long chalk will be the Labour Force figures for April.

The March result caught analysts unawares with the unemployment rate falling further to 5.7 per cent and the economy adding 26,100 jobs. That said, the underlying figures were not quite so strong, with the gains being concentrated in part time rather than full employment.

Total employment was up by 253,000 or 2 per cent over the year to March, which is a solid result but well down from the rollicking annualised peak of 340,200 or 2.9 per cent.

The market is somewhat cautious and expects a fairly soft result for April, with the unemployment rate expected to come in at 5.8 per cent.